Consider two firms,Bob Company and Cat Enterprises,both with earnings of $10 per share and 5 million shares outstanding.Cat is a mature company with few growth opportunities and a stock price of $25 per share.Bob is a new firm with much higher growth opportunities and a stock price of $40 per share.Assume Bob acquires Cat using its own stock and the takeover adds no value.What is the change in Bob's earnings per share as a result of the acquisition?

Question

Quizplus · Accepted Answer

The correct answer is A.Explanation:Bob's earnings per share will decrease as a result of the acquisition. This is because Bob is paying a higher price for Cat's shares than Cat's earnings per share. As a result, Bob's earnings per share will be diluted. The change in Bob's earnings per share can be calculated as follows:Change in earnings per share = (Cat's earnings per share - Bob's earnings per share) * (Number of Cat shares / Number of Bob shares)= ($10 - $10) * (5 million / 5 million)= $0Therefore, Bob's earnings per share will not change as a result of the acquisition.

Consider Two Firms,Bob Company and Cat Enterprises,both with Earnings of $10